The AI infrastructure trade came under pressure this week as shares of several cloud providers slid, credit-risk indicators rose and SK hynix paused plans for a US IPO of its Solidigm storage business, citing market volatility. With major technology companies continuing to ramp up AI spending, investors are scrutinizing the gap between financing costs, cash flow and expected returns.
New cloud stocks are down more than 30% in October
After falling on Thursday, the Nasdaq continued lower on Friday, ending the week down 0.7%. Among major technology stocks, Alphabet was the weakest performer, losing 6% ahead of its third-quarter results next week. Microsoft and Amazon also closed lower, though each fell by less than 1%.
Shares of newer cloud providers including CoreWeave, Nebius and IREN dropped sharply this week. Each is now down more than 30% since the start of October. CoreWeave's credit default swap (CDS) spread has widened to more than 11%, a level generally associated with financial stress, while yields on its unsecured bonds due in 2031 and 2032 have topped 15%. The moves point to greater investor caution over the borrowing capacity and financing terms of some AI infrastructure companies.
Dave Mazza, chief executive of Roundhill Investments, said investors were treating new cloud companies as a group and worrying that valuations across the sector could come under pressure. The concerns are not confined to the US. South Korean cloud provider Elice Group fell 30% on its debut on Tuesday, while Australian data-center operator NextDC dropped 39.5% on Wednesday after cutting its full-year earnings forecast.
AI spending is testing return expectations
Over the past two years, demand for AI has driven major technology companies to invest in infrastructure at a record pace. As spending has grown, however, investors have increasingly questioned whether returns will be sufficient to cover the cost of capital. Analysts at research and consulting firm Gartner forecast that 80% of new cloud companies could cease operations or be acquired by 2030.
Nvidia CEO Jensen Huang struck a more optimistic tone at a company meeting in Berlin this week, describing demand for new cloud services as “incredible.” He also said capital needs far exceed the funding currently available, but that the supply gap would eventually be resolved. Whether financing can keep pace with expansion has become a key consideration in how investors assess these companies.
SK hynix halts Solidigm IPO review
SK hynix said Thursday it had stopped evaluating a US IPO for Solidigm, its storage subsidiary. The company had planned to use a listing to ease its investment burden and increase its capacity to return capital to shareholders. It cited market conditions and share-price performance in deciding to end the review.
SK hynix acquired Solidigm from Intel in 2021. The business makes NAND flash memory and solid-state drives for data centers. The decision comes as demand for AI storage draws attention, and underscores how volatile markets can affect corporate financing and listing plans. With the IPO on hold, investors will continue to watch how SK hynix funds the business and its investment needs.
Meta's free cash flow turns negative as CDS spreads hit records
Credit ratings for major technology companies remain investment-grade, but debt financing and expansion spending are attracting greater scrutiny. Meta's free cash flow turned negative in the third quarter, with a shortfall of more than $2 billion. The company also raised the low end of its full-year capital expenditure guidance from $130 billion to $135 billion.
Meta said its lease and other contractual commitments will total about $825 billion over the coming years. More than $450 billion of that is tied to non-cancellable “take-or-pay” agreements. Its shares fell 7% on Thursday, while its five-year CDS spread climbed above 124 basis points, a record high.
CDS spreads for Nvidia and Oracle also reached record levels this week, at 126 basis points and 343 basis points, respectively. Oracle shares have fallen more than a third this year, as investors weigh the possibility of a credit-rating downgrade.
John Williams, head of derivatives at law firm Milbank, said investors were looking beyond CDS to manage risks tied to AI investment. Whether bullish or bearish, he said, investors need appropriate risk-management tools as large amounts of capital flow into the sector. Brian Stutland, portfolio manager at Equity Armor Investments, said AI investment is connected to the broader market, and that investors are watching whether risks in one area could spread to other parts of the Nasdaq.
The market's focus has broadened from AI demand alone to the sustainability of companies' cash flow, debt costs and expansion spending.